RBI To Make Rate Cuts Count

The Reserve Bank of India out of the blue has decided that they will allow the government bonds to be sold in open markets and announced a new set of rules for the same. That comes as part of the effort to make the policy decisions on rate cuts count have an impact on the economy and also help in liquidity management. It will allow Rs 250 billion worth of bonds for purchase in open markets with an auction to be held for half of that amount on the first week of May. What is surprising to the analysts is the timing as it comes after Rs. 700 billion has been invested into the government banks through a $5 billion swap auction of buy/sell.

At the start of the year, Shaktikanta Das became the new RBI chief, and he is known for his experimentation especially with liquidity management so that the economic policies the central bank takes has the necessary impact. With the commercial bank unwilling to take risks and lower interest rates, there has been no relief for the customers despite two rate cuts that have already be done this year. Due to the reluctance of these banks to lower rates, there is no impact of the RBI’s actions on the businesses or the banks’ customers. For example, the State Bank of India which is the top bank for loans in the country has only cut 5 basis points this year despite two rate cuts by RBI.

India’s rate of interest is the highest in Asia, and with the country having a bad quarter, economists expect to further slowdown in the coming months. An analyst said ‘Banks will not transmit lower rates unless they get easy money’. Traders are also concerned and not sure about the yields that these governments will produce. One trader said ‘Market yields on these papers have moved above the levels which were prevailing before the rate cuts so clearly the cuts have no impact’.

RBI chief after the rate cuts said that he was ‘conscious’ that any rate cut decision should have an ‘effective and appropriate’ impact on the economy.

Many economists like Chief economist at Bank of America was of the opinion that there will be further rate cuts by 25 basis points by June due to inflation. He said ‘Infusing $2-3 billion of durable liquidity monthly is the only way for transmission of RBI rate cuts to lending rate cuts’.

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